Internal fraud: Who they are and why they do it
He looks like a typical associate. She could be a 20-something or a person in her fifties. He could be the person you eat lunch with every day. The truth is that you can’t pick out this person from the crowd. She is committing internal fraud in your company and doesn’t look any different from the rest of your co-workers. He makes sure he blends in.
So what should you look for if you suspect one of your associates is committing fraud?
What to look for
- A disgruntled associate who is vocal about their unhappiness with the company. They often use this as an excuse to commit fraud.
- An overly enthusiastic associate who consistently ask questions about processes and procedures that will help them steal from the company.
- A seemingly harmless associate with no apparent agenda. Their behavior won’t be as easy to spot as the first two. Having audits and checks/balances in place will likely help you catch them.
How they do it
These are not always tell-tale signs of fraud, but those who commit internal fraud are likely to:
- Always be willing to take on additional tasks that could lead to fraud and have nothing to do with their current duties.
- Learn as much as they can about company systems to use in conducting fraud. Systems can include but aren’t limited to: accounting, accounts payable/receivable, payroll, bank account access. They will look for weaknesses in policies or procedures.
- Earn management’s trust with regard to the most vulnerable parts of the company.
Once they gather the necessary information and gain the trust of the company leaders, they will begin their plan. This could be creating “ghost” associates in payroll or diverting funds to a new account for a fake vendor. Sometimes it’s as simple as stealing money directly or even selling confidential company information on the internet.
Why they do it
The best example of why an associate will commit fraud is described by Dr. Donald Cressey as the Fraud Triangle Model, a tool for assessing the risk of fraud. Cressey was a criminologist who studied embezzlers.
- Pressure is often financial and usually stems from addiction, living beyond one’s means, major medical expenses, or gambling losses.
- Rationalization is the explanation why the theft is not really wrong. Some associates tell themselves that it’s a loan and will be repaid. Others feel they are not paid enough and deserve more.
- Opportunity is the opinion that a fraud can be committed without being caught. The thief sees poor internal controls, poor supervision, poor “tone at the top,” or a combination of these.
One of the best ways to avoid internal fraud is to set up regular, thorough audits and reviews of processes in your company. Stay tuned for an upcoming post that will go into more detail about how to catch internal fraud before it does serious damage to your business.
Dennis Knop is a vice president and corporate fraud investigator of UMB Bank, n.a. He has worked for UMB for 18 years, and 12 years of that in fraud investigation. He has a Bachelor of Science in Criminology and Criminal Justice. Mr. Knop is a Certified Fraud Examiner and currently serves as the treasurer of the Midwest Financial Fraud Investigators Group in St. Louis, Mo.